Koninklijke KPN N.V. (KPN) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to KPN's First Quarter 2023 Earnings Webcast and Conference Call. Please note that this event is being recorded. [Operator Instructions] I will now turn the call over to your host for today's Mr. Reinout van Ierschot, Head of Investor Relations. You may begin, sir.

Thank you very much and good afternoon, ladies and gentlemen. Thanks for joining us for today's call. Welcome to KPN's First Quarter 2023 results webcast. With me today are Joost Farwerck, our CEO; and Chris Figee, our CFO. As usual before turning to our presentation, I'd like to remind you of the safe harbor on Page 2 of the slides, which also applies to any statements made during this presentation. In particular, today's presentation may include forward-looking statements, including KPN's expectations with respect to its outlook and ambitions, which were also included in the press release published this morning. All such statements are subject to the safe harbor. Let me now hand over to our CEO, Joost Farwerck.

Yes. Thank you, Reinout, and welcome everyone. Thank you for calling in. Let me start with some highlights from the quarter. In the first quarter, our group service revenues continue to grow. And within the mix, our business service revenues grew for the fourth quarter in a row and that's mainly driven by continued strong growth in the SME segments. Consumer fiber and mobile service revenue showed continued growth, partially offsetting the competitive dynamics in broadband markets. And together with our friends from the joint venture, Hansford, we added 130,000 households to our fiber footprint. In the first quarter, customer satisfaction levels improved across the board and we once again received an award from Umlaut at this time for having the best mobile and fixed network in the Netherlands. And moreover, KPN was also recognized as the best only one provider of the Netherlands. And the good news is both on fiber in the first place and copper, we come in on the second place demonstrating that our investments in qualities of our customer service are working well. As expected, EBITDA declined somewhat due to the cost inflation and the free cash flow was impacted by intra-year CapEx phasing. We expect our EBITDA and cash generation to improve throughout the year, the coming quarters and therefore we confidently reiterate our outlook. Now as usual, Chris will give you more details on our financials and walk you through the outlook of this year. But first I'll take you through the business details. And once again, we've made good progress with our accelerated growth strategy, we started more than 2 years ago. We continue to focus on the key pillars of our strategy. The first is to leverage and expand our superior networks; second, grow and strengthen our customer base; and lastly, to continue to simplify and streamline our operating model. We intend to present the strategy update to the market at the Capital Markets Day later in the year. The fiber rollout is on track to cover approximately 80% of the Netherlands end of 2026. In the first quarter we rolled out fiber to 85,000 households. I already mentioned the households, together we did 130,000 households and we currently cover more than half of the Netherlands with fiber. We expect a gradual uplift in final rollout numbers in the coming quarters. Our continued fiber rollout and growing fiber footprint is delivering an improved penetration rate for retail and wholesale. Looking at the results of the first quarter, we currently generate almost EUR 1 billion of fiber service revenues per year, this year in consumer markets and this number is growing strongly driven by a growing base and an attractive ARPU. So all in all, fiber is clearly at the heart of our strategy to create long-term value for all the stakeholders. So now let's move into the consumer segments. Adjusted consumer service revenues were nearly flat in the first quarter. On one hand, we see consistent mobile service revenue growth driven by base development and growing ARPU. And on the other hand, our fixed service revenues were impacted by anticipated declines from KPN's legacy portfolio. Now despite the rising cost of lending impacting general customer sentiment, I must say, KPN, we continued to lead the Dutch market in customer satisfaction. I'm happy to mention our investments in service and quality of our products and support of all the colleagues working in that environment are really paying off. Net Promoter Score improved sequentially and remains one of our top priorities. Now let's take a deeper look into our first quarter KPIs. Retail fiber base increased by 35,000 customers despite a solid subscriber inflow. Our total broadband net had showed a small decline. In March, we observed a gradual improvement in our order intake. So going forward, this together with the new portfolio lineup and the customer focus should support an improvement of a broadband base trend again. Fixed ARPU remained a little bit stable at EUR 53 and combined, our fixed service revenue decreased 1.7% year-on-year. Our postpaid days increased by 11,000 and the postpaid ARPU grew almost 1%, and combined, this led to a solid 3.4% growth in mobile service revenues. Then a look at the B2B segment. We saw continued service revenue growth in our business segments. The B2B adjusted service revenues grew more than 3% year-on-year in the first quarter with growth across all segments. Business Net Promoter Score improved further despite volatile economic environment. So also B2B customers continue to value KPN for the stability, reliability and quality of our network and services. SME is the main engine of B2B growth driven by solid commercial momentum especially in mobile. We serve our customers via our cloud-based KPN One platform and the customer base is doing good. But also LCE continues to move in the right direction, showing growth for the second quarter and we are finalizing the migration of our customers from legacy portfolio to the new environment. And we are confident we are on track here to create more growth in the LCE segment. Tailor solutions continue to perform in line with expectations. And as we communicated previously this business remains subject to the timing of projects and related hardware sales. In wholesale, certain revenues were broadly flat in the first quarter and the growth trend levelled off compared to previous quarter due to the impact of several small one-offs in Q1 last year, so positive one-offs in last year. But looking forward, I'm confident that we get actual growth trends in wholesale again. We added 25,000 postpaid since in the first quarter, while our broadband base was stagnant. Now before I hand over to Chris, I would like to mention that we increased our ESG disclosure in today's presentation. In the appendix we include a slide with more insights and additional KPI regarding some of our non-financial ambitions in this respect. From today and in line with our commitment to sustainability, we will be able to track our performance on carbon reduction, circularity and diversity on a quarterly basis. And with that, let me now hand over to Chris to give you more details on our financials.

Thank you, Joost. Let me take you through some of our financial numbers. Let me start by summarizing some key figures for the first quarter. First, our adjusted revenues increased 1.9% year-on-year, mainly driven by growth in business in consumer mobile and higher non-service revenues. Second, adjusted EBITDA after leases decreased 1.6% year-on-year and sustainable top line growth was offset by higher costs. In the first quarter and in line with our expectations, our cost base was affected by inflationary headwinds such as weight indexation, rising energy costs and higher lease costs. This translated to EUR 12 million higher in direct OpEx. But actually, if we were to exclude our higher energy costs adjusted EBITDA would have been in line with last year. And while it's still early days, if the moderation in energy spot prices continues there remains some scope for modest upside to our 23 EBITDA guidance. In the meantime, we keep working hard to further reduce our energy consumption. Third, free cash flow decreased 20% compared to Q1 last year mainly due to higher CapEx as a result of entire year phasing. We'll offer more detail on underlying cash development later in this presentation. Group service revenues increased by 1.2% when compared to last year, underpinned by especially strong growth in our business segment. Business service revenues grew by 3.1%, mainly driven by continued strong performance in SME, while both LCE and Tail solutions also contributed to growth. SME again outperformed against our expectations with about 7% growth in service revenues versus last year. Also service revenues were broadly flat year-on-year which should resume positive growth in Q2 again. And in consumer, the service revenue tried to improve slightly compared to the previous quarter but are still marginally negative. Mobile service revenues continued to grow. In 6, we reported a decline as the growth in fiber was offset by the decline in legacy services, less voice traffic and the accounting effects of content packages. For the remainder of 2023, we continue to expect some headwinds but the year-on-year trend is expected to improve supported by the price adjustments and commercial improvements. Moreover, the accounting and second half deck how we reported broadband supers revenue growth for the past 12 months will have lapsed and when we meet again and we present our second quarter numbers. At EUR 164 million, our free cash flow margin declined to 12% revenues. The debt in free cash flow is explained by different phasing of fiber-related CapEx. For 2023, we expect a more evenly distributed CapEx level throughout the quarters. For the other free cash flow items, the impact of higher cash taxes, working capital fees and lower EBITDA were offset by lower interest expenses and restrained restructuring charges. All in all, and contrary to 2022 we had a relatively soft start to the year in terms of cash generation. As highlighted in our full year results, we expect this year's free cash flow to be somewhat back-end loaded, reflecting also the time of EBITDA generation, CapEx phasing and improvements related to working capital and other items such as cash taxes. So looking at, we expect gradual improvement in the free cash flow number throughout the year and we remain confident to deliver on our free cash flow targets. Finally, we have quite a strong cash position. We continue to have a strong and resilient balance sheet at the end of March with a leverage ratio of 2.2x, comfortably below our self-imposed ceiling of 2.5x. Also, our interest rate coverage ratio remains strong although the sequential increase is related to the phasing of interest payments and expect it to normalize in the remainder of the year. As a result of higher interest rate, floating debt and other corporate actions, our average cost of senior debt increased by 146 basis points year-on-year to 3.9%. In March, the remaining outstanding principal amounts about $250 million of our U.S. dollar hybrids. And next quarter redemption only takes place in 2024 which gives us plenty of time and flexibility in current volatile markets. Moreover, due to the current volatility, we reswapped some of our floating debt back into fixed, and as a result, our exposure to floating rates was reduced from 36% to 70% of our debt. Total liquidity remains robust. It consists of EUR 1.5 billion in cash and short-term investments and our overall revolving credit facility. So overall, we're very much on track and confident to deliver our 2023 outlook we gave to you in January. So to summarize, KPN generated results in line with expectations and we continue to make good progress with our accelerated growth strategy. We see sustainable growth in group service revenues with positive signs across all segments, especially gradually improving order balances in the retail segment. Our fiber rollout program has maintained the sort of pace as a proven attractive return profile, and KPN continues today in such marketing consumer satisfaction as evidenced by the awards that was mentioned and our NPS improvements. Finally and as expected I indicated earlier to you, we had a relatively slow start compared to the previous year in terms of EBITDA and cash generation. However, sustainable service revenue growth run rate and the matches we've put in place provides with confidence and ability to return to EBITDA growth this year. And therefore, we confidently reiterate our outlook. We expect the coming quarter Q2 to be about flat versus last year and in Q3 and Q4 to show solid positive EBITDA growth again, and we observe and expect a similar pattern for our free cash flow. Thanks for listening. Now let's go to your questions.

Thanks, Chris. And I would like to remind you to please limit your questions to 2. Operator, over to you, please.

[Operator Instructions] The first question comes from the line of Luigi Minerva calling from HSBC.

The first one is on the outlook for B2C service revenues starting from Q2 onward. I'm wondering what are your expectations based on the saving of promotions in the market and the competitive dynamics that you've observed in recent weeks? And the second question is on -- just to get some more color about the management change. So Marieke Snoep is transitioning from Head of B2B to Head of B2C and I'm wondering what kind of B2B lessons can be helpful for B2C? Particularly, I'm thinking about managing the transition away from legacy services, fixed services products, which is basically what is keeping your fixed service revenue in B2C in negative territory?

Luigi, on the outlook for B2C service revenues. If you start with the underlying drivers, obviously, we had negative net adds in broadband in Q1 and slightly subdued postpaid net adds in Q1. On postpaid, we have some green 4 just churn in terms of technical measures that will revert in Q2. So I'd expect in Q2 for the whole mobile net add to go back to the -- or not as closer to the run rate we have on the average of last year. And when you look at the underlying order balances on broadband we've seen in the last few weeks, since mid-March, and the market have to normalize, they look a lot better. So I would expect all to also see better and possibly positive net add in broadband. -- it will not be spectacular, but at least no longer the decline in -- broadband net adds, if the market stays where it is, which means that for, I think in Q2, you see mobile net service growth to go up. Now 3.4% will get close to 4, I think. Fixed service revenues is bottoming out, will not be flat in Q2, but getting close to 0. So that means the total consumer revenue should be positive in Q2. And if you implement the price increases it's my understanding or expectation that even fixed will cross the line in Q3 and become positive. So basically, underlying gradual improvement in market circumstances, reversion of temporarily increased service mobile with better net adds. If not spectacular but at least positive, that will support, as I said, improving service revenues in mobile and bottoming out in 6. And if you think through price increase possibilities, bearing, of course, a market that close in preserve again, but normally is speaking, you'd expect also fixed to cross the 0 line and start showing some positive service revenue as a Q3. Yes, Luigi, on the management change, good, by the way, you mentioned it. Yes, so not unexpected for me, Babak Fouladi decided after 4 years, 4.5 years in KPN to move back to the U.K. He did a great job. Jean-Pascal van Overbeke decided to step down as a KPN board member for personal reasons. So that then gives me as the opportunity to do a bit of strengthening the team and do a reset where needed. So we decided to move Marieke Snoep from B2B to B2C. I think Marieke did a great job on B2B by reorganizing the business in a more logical way, split it up in 3 business segments and then motivating the teams to do the job, and that is the real challenge in B2C. We have a plan, we know exactly what to do. It's, of course, based on fiber, but it's also about improvements we do in customer environment. It's about the regional approach we installed in the Netherlands because we compete against players in different regions with different tactics. So all in all, it's not on what we have to do, but on how we do it, and that is where Marieke comes in. So I'm confident that she can really encourage the teams to go faster on the execution of our plans. And I'm happy with the move from Marieke to B2C. Then on B2B, Chantal Vergouw in from a Dutch insurance company. She knows KPN because she was in the supervisory board -- for a year. Yes, she's super-motivated and a high talent. She understands the Dutch market quite well. She's in the content of B2B, so she makes a flying start and already in touch with the different team members. And in our technology and the operations department, Balderston Meyer, who's already working at KPN for more than 12 years, did a great job on strategy and other projects. Last 6 months, he was in the heart of the end-to-end fiber steering to improve that part of our business. So is now moving into operations and also he has the ambition to go faster on the execution of things. So all in all -- and then again, Chris here sitting beside me is still unchanged, still the same Chris. [indiscernible] and myself didn't change. So all in all, I'm happy with the new team. It's really working, and I'm looking forward to work together with -- the team.

That's great. And Chris, if I may quickly follow up with regards to price increases in H2. I think Vigo has announced they will apply inflation. In the past KPN has kind of matched salary increases with the price increases. Should we expect the same rationale?

Well, Chris mentioned the cost increases we faced in Q1 and energy labor costs pretty high up because we do a CLA increase of 6.5% this year. Yes, we -- when we -- take the decision on price increases, especially in consumer internet, -- we always take a look at what we do on CLA. So it's pretty -- I think our expectations work quite well that we will work a bit in that line but of course, we have to take a final decision somewhere in the coming months, but it will be higher than last year. And we also now follow kind of a bit different strategy because last year, we changed all contracts in consumer segments on broadband. And we installed the clause that gives us the opportunity to do a price increase so we don't have to go out on a communication scheme 2 months in advance to inform the whole base. So of course, we will communicate to the base price increase but we a bit less louder than last year.

The next question comes from the line of Maurice Patrick calling from Barclays.

Just sort of talking pricing too much. I just wonder your thoughts in terms of how much of the price increases that you've put through or flow through to ARPU? One other big discussion that seems to be amongst companies that net gross price increase offset by down spending, some churn. I guess from your experiences, how much of the price increase that you put through and payers are put through, do you think will flow into lower ARPU? And just a quick follow-up on the previous question, if I may. On the broadband net adds, did you say that you said it will go back to growth in Q2 or should be broadly flat in Q2. I wasn't quite sure what you said in the broadband.

Well, in broadband net-adds yes, we plan for growth. So a bit tricky to predict what's going to happen in the coming 2 months. But looking at the current flows, I'm -- yes, we are in a better shape in Q1, let's put it that way, but let's wait and see. But of course, we aim for growth at the end, that's why we do all the fiber installment. And on pricing, yes, you're right. I mean that's a good question. There's a base. We do a price increase. And once expect -- expect, sorry, that price increase to be reflected in service revenues. And it depends a bit on the base and the back book and the front book, et cetera. So in mobile, we have the consumer-based postpaid, which is growing, and there's 2 movements in that base. It's KPN moving customers more to unlimited, improving ARPU. And in SME doing more the growth of the SME base. So in SME our strategy is to grow the base KPN strategy is to improve the ARPU and the plan of that is reflected in ARPU improvements. Anything to add there, Chris?

[indiscernible] the first month of the second quarter is not just final, so for 30 days. But if I look at order balances, they look increasingly positive. Of course, they will take some time to convert into net adds, and as always, a cancellation risk. But Q2 will not be spectacular, but we've not given up hope on small positive broadband numbers. So it's a loss spectacular, but certainly better than Q1 and an option opportunity for some positive broadband numbers -- and yes, you're right. As we grow there's a couple of things, right? There's always the sector decline in voice. So fixed voice is gradually fading out. That is a structural development. We've seen some migrations [indiscernible] although it slowed down a bit after the other commercial actions slowdown. So that should also be supportive. So we have some company that of the price increase, it will be slightly more sticky than last year given the underlying development that we see at this point. But again, it's something for our stores to be very watchful when it comes to that point.

The next question comes from the line of Usman Ghazi calling from Berenberg.

So I just wanted to look at the fiber revenue growth trend versus the copper revenue growth trend in the consumer market and the consumer segment. What I can observe is that the growth rate in the fiber service revenues, they used to be roughly 14% through most of last year. It's come down to roughly 10% in Q1. Meanwhile, the copper declines that were roughly 14% or above 14%. If I kind of adjust for the various provisions that we faced in Q1 last year, obviously, reported, you're saying copper is down 11%, but excluding these one-offs, it seems to be down less than 10%. So given the accelerating kind of migration from copper to fiber, it seems somewhat counterintuitive that fiber revenue growth has come down and copper declines have come down as well. So could you perhaps provide more color? Is this just a function of more price promotions in fiber or something else? That was the first question. And then the second question was just on the -- if there's any update on the market analysis of the regulators preparing on the broadband market?

Yes, the question is we've seen though with fiber growth higher than copper growth. We have some net decline in fixed in revenues. Fiber growth came off a bit interesting when you look at the fiber numbers, it was still net adds positive. So if you take net adds fiber and if you exclude whatever copper migrations there were, so growth -- net adds minus migration from copper, there is underlying growth in fiber. So fiber still is attracting net debt new customers to the KPN network, slightly less in the first quarter than we had last year, and we relate that to the commercial and pentane market. Actually, fiber gross sales were higher than ever in the last quarters, but also churn was higher. And I think that's all to do with the severe price competition. So my explanation is that, yes, you're right in your observation. Gross adds fiber very high, churn also a bit higher in fiber but the net debt adds ex copper migrations were still positive, but a bit less than what we're used to. Although if you look in the quarter, you can see [indiscernible] to March gradual improvement of the net adds in fire. So I'd expect this trend to be supportive. And thirdly, on the ARPU side, of course, we did see some more -- of course, some more discounts and customers who did went then for a full discount. So that also showed up at all the fiber numbers. So to me is a function of the commercial intensity. And I think the fiber growth relative to copper growth which normally stabilized in the rest of the year. As when it comes to the ACM, we don't know. I think they're working on a review of the market. I don't know exactly where it stands. We do not expect any surprises from them. Interesting then they pointed out in a press release some time ago that they were looking in parts of the cable market [indiscernible], particularly, but also to set that there was no concern on the fiber market competition in the fiber market was safeguarded and say. So I don't know what the timing is, but I don't expect anything that -- any surprises there. Yes. And these market analysis is something they have to do on an annual basis. So that's -- yes, it's not a surprise for us, but -- so we are pretty confident that our wholesale framework stands as supported by ACM recently.

Great. Just a follow-up on the wholesale. So I guess, I mean, the question is going to come up anyways. But I guess the volume intake is a bit lower on wholesale. You mentioned, obviously, you have in cable being aggressive. So the alternative kind of providers struggling a bit. I mean, are you considering maybe taking a tactical kind of approach to incentivizing wholesalers a bit given the cable strategy? In wholesale, we saw the same development, similar development as in KPN, so affected by the commercial intensity in the market that's faded a bit during the quarter and normalized. So you saw also a greatly improving wholesale order balance. What I find in wholesale we, of course, a large client but some other clients, we saw also the smaller clients recover.

So summary answer is one similar development as in consumer, affected in our view by the commercial intensity market. And the good news is recovery during the quarter and a broadening base of wholesale customers in broadband. And now that you're not asking it, we're talking about wholesale, I just want to make sure you guys will see we had some lower growth in wholesale mobile, but that was very much a year-on-year effect. If you go back to Q1 last year, we saw a really big spike into service revenues mobile, which was driven by a one-off. That caused a year-on-year mobile growth to be negative. If you correct for that, and that was a one-off in terms of revenues last year, which was not even all margins, but a one-off in service revenues. If you correct that the underlying mobile growth in wholesale in mobile are still positive. So summaries encouraging trends, if not particular but a cruising trends in broadband wholesale in the quarter. And similarly, underlying growth in mobile better than what was reported due to on year-on-year comparison, and that will also show up into improving wholesale service revenue growth in Q2. So you got a full board of questions. On the broadband market in general, in the Netherlands, it's fair to say, okay, there was one broadband service provider introducing pretty aggressive discounts. We decided not to react on that because we're, like I said, differentiating ourselves on quality, on the quality of the customer service products, but other players on our network didn't either. So the good news is that it's not a market where we all follow the sharp discounts of one player. And so I think that broadband market is prepared to hit in March on that.

The next question comes from the line of Konrad Zomer calling from ABN AMRO ODDO BHF.

The first question is on your free cash flow development related to a more smooth CapEx development throughout the year. Is it fair to say that you also think that your fiber rollout might be more evenly spread throughout the year as in we're likely to see more quarters with less than 100,000 homes passed from KPN than we might have seen in the past? And my second question is on your price increase again. It seems that the main date that you might put that through will be the 1st of July. Why would you not bring that forward? Is there a contractual reason not to do it? Or is that a commercial reason not to do it, given that your 2 competitors already put through significant price increases before you did?

Well, to start with the second one, and then I hand over to Chris. But so what we saw is that usually T-Mobile is going to make the price increase beginning of the year, so no change there. And we saw an announcement of another player in the market early, but not followed with the -- by the execution that will be done later. So that was a bit of a fault -- and I like the idea of just following the pattern we usually do, which is always 1st of July, that's how we treat our customers. We do it 1st July every year. So it would be a bit of a rough move to gain the advantage of 6 weeks or 2 months to do it faster than that. So it's also a process we play delicately to explain why we do it, how we do it. And yes, I just mentioned that we look at the CLA increase on our side. So that means that this year could be much bigger than other years and especially in B2B, we do higher than that. So there we also follow up contracts. So it is a process. We play very carefully not to annoy our customers to put it that way.

So it's a commercial decision.

Well, it's in the contracts that we do it annually, probably we could do the month earlier, but I think that is not the way we play this to our customers. I mean, they are used to be processed 1st July is also good, easy, quiet moment in the year to do it. And I like the idea just following that. And yes, do it on the 1st of May or something like that, then we gain 8 weeks. So we're in the long-term value creating business steering and that's why we stick to the plan. Free cash flow question, it's really about timing of CapEx, not so much growth of fiber numbers. We had more CapEx in Q4 last year and also more CapEx in Q1 this year. And especially in fiber, the businesses is so that if you start a building stream, actually you start to pay up, you pay a little bit more cash in the beginning of the project and later less in the later phase of the project. So basically, the CapEx increase last year, the CapEx start of this year, we'll have some negative cash implications year-on-year on Q1 and also to tiny bit in -- all of a bit in Q2 because you start up new fiber building sets, and we started up more fiber new building teams, and that will come into CapEx. What does it mean for HP? I actually expect the amount of homes passed to greatly improve in the year as well. So the CapEx cash out is not easily linked to the amount of HP you provided during the quarter is actually the CapEx and then the cash outs are linked to the starting of building schemes that will deliver homes passed in 6 to 9 months later. So 2 reasons, one is free cash flow driven by CapEx increase last year and CapEx step-up this year, which are a function of an increase in number of building teams and as a separate development that has some implications for the timing of our free cash flow during the year. And secondly, I would not be surprised if we could see some ramping up of the weekly or monthly delivery of FTTH homes pass numbers. But those are not immediately linked to -- at least not in the same quarter.

The next question comes from the line of Nawar Cristini calling from Morgan Stanley.

I've got 2. Firstly, starting by B2B. So clearly, your top line growth is trending nicely. I have a question on profitability precisely. Could you talk a bit about the profitability profile of the incremental growth in B2B? How does the new business compared to your current B2B margin? And then my second question is more of an industry-related question. On the fair share debate, so a number of telecos are pushing really hard in here to get a CapEx recovery payment from Big Tech. Could you talk a bit about where you stand in this debate. The consultation is ongoing, and it would be helpful if you could share your views, latest thoughts and expectations here.

Yes. No, let me take the first question on the B2B business. When you look at the SME growth, that actually is quite high margin is because our SME business is well mobile business, that's cloud Workspace business in there, some broadband. So in SME, I would say, new business has a similar margin to existing business, slightly dilutive possibly because we have a little bit more cloud and workspace, which is a lower EBITDA margin than typical mobile or broadband. But in general, broadly speaking, Spine business is similar contribution margin as the old business. In the large corporate segment, it's slightly negative. It's still a positive margin business, but is slightly margin dilutive, but also cheaper to present to produce. So what you see in the LCE business that the contribution margin, some of our new business is lower, but it's much cheaper to produce. I would take up costs. And then you see cost savings in the CDO unit in the network. So end to end, the margin is healthy and similar. It shows up less in B2B, but it shows up in the cost reduction in our TDO business because it's simpler, more standardized business so that leads us to take out costs. So in SME, you can look at it almost like in isolation in SME. In LCE, you have to also look at the cost improvement in our TDL business to look at the end-to-end opportunity to show that some standardized low contribution margin business also leads to lower cost upstream at KPN when it comes to the unit produces products and you can put out cost there. And on your point of the date and year ongoing on a fair share. Yes, on one hand, I should say we see more and more European telecos taking an acquisition in the bank. And KPN, in general, we support at the base, and we follow it closely. There's a lot of growth rates of IP traffic coming from other top players that have a big impact on our network. And the whole discussion is unreasonable efficient of the network, so not on net neutrality. But on the other hand, it's a bit of voice from the past, I must say personally. So I understand where it comes from. But it's the model we introduced long ago. And you could also say it's mainly the end user paying for usage of older capacity. So balancing that out in a different way, it could be helpful. But for me and for us, the main challenge is to approach these over-the-top players and see them not as a threat but more as a partner. We have built our strategic locations in the Netherlands. And together with our new network environments, the fiber network, etch, we're rolling out around these locations. We think we have a unique position in the Netherlands to support Microsoft or Netflix to make use of our strategic locations, our ad solutions are a bit close to the customers. So I would like to think more and more of these big players as future partners than as a threat doing all kinds of IT traffic downloads dumps on our network. But for me, I say we support the whole discussion.

The next question comes from the line of Steve Malcolm calling from Redburn.

I have 2 questions if that's okay. First on just coming out to me. It continues to grow very healthily 8% to 7.5% this quarter. Can you maybe just sort of help us in the follow a little bit in terms of what the volume price mix drivers behind that growth and the visibility you have of a future growth. You mentioned, I think you moved to mobile bundles, maybe an idea of what proportion of the base in this new segment is on unlimited and what is for further upselling would be really interesting. And then just back to fiber, just want to kind of hear your thoughts on the overbuilding I guess what you're seeing in the market today, maybe versus what you were seeing 12 months ago. I think we all probably think that higher interest rates and inflation is a fairly major impediment to those business plans, but curious to know what you're seeing on the ground and whether the levels going to be changed over the last 12 months.

Yes, Steve, on SME. It's actually less price, more volume because the price increase on SME have not been put through this year as well. So it's more of a volume, I think, kind of a pricing thing. And it's volume driven by increased number of triple play customers. The customers who have multiple products. We see an increase in mobile penetration and repeat buying of existing customers, still good employment development in the SME part of the economy. So our customers are still hiring new staff and partly it's obviously equipped with a workspace and mobile phone subscription, et cetera. So it's an increase in mobile base, and it's increasing cross-sell with the amount of EE customers. We have subscription ARPU stabilizing, increasing the share of unlimited and our SME base as well, good base growth. On broadband, I think we could do better. There is growth in the SME base, there's positive broadband growth in SME, also driven by our strategy to roll out fiber and business parks. But I think we could do more, we're certainly not satisfied there. And then there's a decline in traditional voice and VoIP being stable. And then...

Chris, is that volume coming from competitors? I mean how much is market, how much is share? Any color on that? And how sustainable that -- those trends are?

I think a little bit market. I think as this market...

So in all reality, part of that is coming from competition and that also has to do that we cleaned up 2 base, moved it all to a cloud-based portfolio. During the migrations, we lost some customers over the last years. So on that part, it's coming back now because the KPN solution is working perfectly fine to me. And so we really see, especially on the connectivity part customers coming back. And also, I think Chris, SME market, in general, is growing on our side.

The SME could be growing and we do have a very large share in Fido. I think without pumping our chest too much, but our KPN One platform with all products in their increased security solutions is actually differentiating and distinguishable provider. So there's a significant portion of market growth with SME customers employing more starts. And as Joe said, is also increasing that our platform is in place. It's all cloud-based. It has no legacy products anymore. You do see that customers are bringing back business to us because we have a broader set to offer, that show is also in the amount of triple-play customers, which is now increasing. I think 50% of our SME base is now double or BBB, and that's a good sign, of course.

And then do you think you can keep growing that sort of run rate in terms of growth, is that credible?

I think actually, firstly, I would paint probably Q2 looks better than Q3. I think in the long run, 5% to 7% is probably where SME should be in for quite some time now. But then again, we expect it to flatten out. It hasn't, but stayed on with a higher growth path than for longer and especially, I wouldn't be surprised that you can see a small reacceleration in Q2.

Yes. So on overbuilt, the Netherlands is until today doing quite good issue. So in the Netherlands, we have our rollout program. The one big player that obviously fixed regions we are not in. And there's another one that is mainly targeting the larger cities where we are as well. So either we come to a conclusion or we are going for a bit of overbuild in the Netherlands. But all in all, I must say that until today, we really avoided out build in the Netherlands on a big scale.

Next question comes from Georgios Ierodiaconou calling from Citi.

Firstly, a follow-up on some of the comments you made earlier around churn being a bit higher on the broadband base in the first quarter. I'm just curious whether that was mainly the result of promotions from the cable player. There was also, if I'm not mistaken, last year, some promotions from you around TV that may be with the first anniversary of that, there is a bit of impact from this. But I'm just curious as to how you are thinking about churn for the rest of the year, whether you remain confident. I know you commented a bit about the second quarter being better, but also in the second half with the price increases, whether you remain confident in stabilizing, maybe slightly growing the broadband base -- and if not, then maybe give us a bit of an indication as to how you expect to compensate that? And then the second question is around working capital. And I think, Chris, you mentioned the fact that CapEx will be very linear this year. Normally, what we've seen from other telcos is when you have significantly higher CapEx in the second half in 1 year in your case in '22 and then more linear the year after, there tends to be naturally some working capital outflow linked to the CapEx payments. So if I remember correctly, you expected working capital to be slightly positive for this year. Is that still the case? And do you mind just giving us a few pointers as to how you get there.

Yes, Georgios. To start on that churn point in broadband. In simple terms, it's pretty fair to say that the first quarter was impacted by promotions by others in the market. And you're right that we did something on TV last year. I think for Chris and myself, it's very important to keep our sales team's discipline on how to react where we try to act as a market leader and not as a follower. So that's the strategy we choose for Q1, and we see things improving, looking at the trend in March and further. So I expect better trend on Q2 and looking forward today, I must say. So we are -- the market is in -- is competitive on one hand. On the other hand, in a good shape because the large service providers all introduced pretty large price increases. So that was announced by T-Mobile affordable email, and we will communicate in May on that. So that works quite well because we all do large investments in our infrastructure. And so I think that's needed in today. On the other hand, a bit of a strong competition, discounts, et cetera, we didn't follow a bit of impact on the churn in Q1 and now we see the improvements.

Yes. And Georgios on your working capital, you're completely right. If your working capital is more flat at the path you described would lead to some working capital headwinds in the first half of the year. You saw that in Q1. Look, for example, our trade payables. The trade payables numbers made quite a big swing from Q4 last year to Q1 this year as compared to last year. So that actually has to do with the timing of fiber, new fiber building teams being put online being put out and during visit faster. So that's one. Secondly, so we see an opportunity to improve working capital in the second half of the year. First off, because of this timing effect. Secondly, there are still measures we can take, for example, in smarter invoicing, not even sorting payment terms, but sending out the invoice earlier. We've identified those areas with large corporate customers where we find that the time lag between finishing a product and then actually sending the invoice is like somewhat uneconomical for us. So that's where we can prove. We will talk to you about inventory management, we have quite a large stock of CB, consumer premises equipment, mostly in line with our Android TV launch that we launched, we bought 5 new set-top boxes for Android TV. Last year, we built a significant stock of CPE, given potential supply chain issues. I could say we're a bit overstocked in that area. So expect us to run down that inventory over time. We have some stock of materials for consumer support activities. So it's a gradual rundown of inventory. It's smarter continuous optimization of your working capital of your invoice terms, some extent on payments in terms of more on the invoice terms and then a gradual fading of the working capital direct CapEx spike. So expect growth capital to be also a little bit of a headwind in Q2 and that improved in the second half of the year.

Just to clarify, you still expect it could be positive for the full year or around flat positive?

Well, slightly positive. It's not going to be a massive number, but it's slightly positive, I think for the year.

And the last question comes from Keval Khiroya calling from Deutsche Bank.

I've got 2 questions and slightly longer term. So you've talked about the scope of CapEx for post 2026. I appreciate this is a topic for the CMD. But at this stage, would you be able to share any thoughts on how we should think about longer-term CapEx? You've talked about non-FTTH CapEx sales running at less than 14%. And does this still make sense at the group level after fiber? And then secondly, as we think about you reaching the 80% Fiber home coverage target, what are your latest thoughts on what to do with the remaining 20%? It sounds like you want to avoid overbuild, so would you consider wholesaling of the alternatives or M&A at all?

Keval, this is an important part of our strategy. So we're building a fiber network. We think we have to cover 80% of the Netherlands, not because we don't want to serve 20% of the Netherlands, but we think it's pretty fair to assume that third-party players will cover the other 20%. And that's what we're building. And then at the end of that program, our CapEx will go below EUR 1 billion, and our free cash flow will go above EUR 1 billion. So take that in mind, the number of EUR 1 billion. That's an important one on our Capital Markets Day, I would say. Yes, wholesale, that is our business. So we're opening up our network for other players. We're not making use of other networks because in our vision that would encourage other players to speed up a rollout because that will defeat the business case. So we currently see third-party fiber struggling on getting the right penetrations to make the business case work. And so we take the decision in these areas to benefit from our upgraded copper network until we are there with copper ourselves. At the end, when we were reaching the point of 70%, 80%, that could be a moment to consider the usage of third-party networks, but not today, that will be a strategic mistake, I would say.

Yes. To the point, as you said, you will see a significant drop-off in CapEx after 2026, we'll continue. I guess there will always be some fiber CapEx after 2026 or 2027, there's new builds, there are some connection activator that you need to do to enable you some final zip codes you want to do above or beyond the 80%, but expect a certain portion of fiber CapEx and the rest of non-fiber we still stick to those numbers. Whether it's '26, '27, we see it maybe taken a few months longer than '27 to get there, but it will be around that zip code we'll see that drop in CapEx. So we're pretty confident in that. And given the fact we're molding KPN to run with like non-fiber CapEx at the current stance by the time that, that you used to that spending level, right? That's how you get because we get used to that level of spend on non-fiber CapEx. So when the fiber drops, you keep the portion new build for Homes Connect, executives and we stick with that. And to Joe's point, the final 20%, there's no point at this point in being a wholesaler and a competitive network that will be a strategic mistake. We'll continue to build, we believe that overbuild, selective over build creates value, create to return over our cost of capital, we look at that. And if we're remaining 20%, we might do some also there. We might also look at the rural areas, right? We might look at a combination of fixed wireless and copper productivity for hybrid solutions. So we have something to offer there as well, 5G is also. But again, your point on a significant state once we reach the 80% fiber mark, that is absolutely still part and parcel of our strategy.

That concludes today's conference call. If you have any further questions, please contact the KPN Investor Relations team. Thank you very much.

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